Vestas stock tumbles; managers fight for recovery

The world’s largest wind company has lost 52% of value in a year

By

SaraSjølin

NEW YORK (MarketWatch) — Vestas Wind Systems, once the darling of the stock market sitting on top of a hyped industry, has seen its share price plummet 52% in the past year to a five-year low, sparking speculation it’s a possible takeover target.

Lack of confidence in management, repeatedly missed profit projections, low profitability and negative cash flow have all contributed to pushing the stock down more than its rivals.

And even as the company follows a high-profit strategy, shareholders remain worried.

Wind turbines generating near Palm Springs, Calif.

Vestas’ troubles tell the story of a wind industry struggling with lower demand and increased competition at a time when the world focuses more on economic recovery than clean energy. At the same time, better stock performance by rival wind companies suggests Vestas’s struggles have as much to do with investor confidence and perceived mismanagement as lack of demand.

“Vestas’s order intake is better than what the stock price reflects. The stock price says that investors think the company will not make any money, but it will,” said Jacob Pedersen, analyst at Sydbank.

Analysts surveyed by FactSet Research estimate that Vestas (VWS)
VWSYF, +1.34%VWDRY, +1.23%
the world’s largest wind-turbine maker, will end fiscal 2011 with profit close to double that of 2010.

Vestas expects revenue of $10 billion in fiscal 2011, but shareholders worry that the Danish company will miss targets in the future, as it has in the past In 2010 it missed its guidance, and when the company announced profit losses in the first quarter of 2011, investors fled the stock.

“We had already said there would be a minor loss, but the investors didn’t think 85 million euro ($123 million) was a minor loss,” said Peter Kruse, head of communications at Vestas.

In addition to quarterly and yearly guidance, Vestas has a long-term target that shows the management’s optimism. The company’s goal is to reach a 15% operating margin and 15 billion euro in revenue in 2015. In 2010 the operating margin was 4.5%, making the strategy not only ambitious, but also “extremely unlikely,” according to Alasdair Leslie, analyst at UniCredit Markets & Investment Banking in London.

“Wind power is not a 15% margin industry. It’s about the competitive dynamics, and more supply than demand in the market makes it hard,” he said. “Siemens AG
SMAWF, -0.15%
and General Electric Co.
GE, -1.54%
don’t think wind is a 15% margin industry.”

Green losing some luster

The lack of trust in management also derives from lower profitability than competitors. Before the financial crisis slowed demand for wind power, Vestas increased investment in research and development facilities and plants in Spain, China and the U.S.

“We had to invest globally or we would have been marginalized,” Kruse said.

Hopes that the Obama administration would pass an energy bill along with the European Union’s 2020 climate target bolstered expectations that the wind market would grow across continents. But as governments struggle with budget cuts and sovereign debt, green energy projects have lost priority, Sydbank’s Pedersen said.

“Incentives and subsidies for wind turbines are not popular among populations, and the expansion of the industry is not as fast as expected,” he said.

Vestas’s pre-crisis investments have left the company with excess capacity and instead of cutting back during the crisis, it invested, unlike its rivals. With less demand for wind turbines, profitability fell, pressing against cash and leaving free cash flow negative in 2008, 2009 and 2010.

“Gamesa
GCTAF, -0.19%
is more profitable because it cut back expenses during the crisis,” said John Hardy, analyst at Gleacher & Company Securities Inc., of one of Vestas’s rivals.

The drop in the stock price has fostered speculation that Vestas could be a possible takeover target for peer companies looking for a more global reach. With a market cap of $5 billion, the company is a lot cheaper than its $22 billion price tag in 2008.

“Compared to the rest of the industry, Vestas looks cheap and if you have faith that wind will continue to grow it’s a good deal. It’s an extremely cheap admission ticket to the global wind market,” Pedersen said.

Leslie of UniCredit called the company “arguably a nice acquisition at the right price” and points to Asian players that desire market reach as potential buyers.

“But they would probably prefer to grow organically. We generally haven’t seen big acquisitions from Asian players, and Vestas is still too big to be a takeover target,” he said.

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